Portugal’s taxes for expats will be changing very soon. Therefore, one such challenge is understanding and navigating your new home’s tax system. For expats in Portugal, it is essential to have a clear understanding of your tax liabilities to ensure compliance with the law and minimise your tax burden. In this comprehensive guide, we will walk you through the intricacies of the Portuguese tax system and provide valuable insights on minimising your tax liability as an expat.
Understanding the Portuguese tax system
Before we delve into the specifics of tax liability for expats in Portugal, it is crucial to have a basic understanding of the Portuguese tax system. Portugal operates on a progressive tax system, which means that individuals with higher incomes are subject to higher tax rates. The tax year in Portugal runs from January 1 to December 31, and tax returns must be filed between April and June of the following year.
The Portuguese tax system is based on the principle of worldwide income taxation. This means that if you are a tax resident in Portugal, you must pay tax on your worldwide income. However, Portugal also has tax treaties with many countries to avoid double taxation, ensuring you are not taxed twice on the same income.
Tax residency and non-residency in Portugal
Determining your tax residency status is crucial when understanding your tax liability in Portugal. In general, you are considered a tax resident in Portugal if you spend more than 183 days in the country in a given tax year or if you have a permanent residence in Portugal. If you meet these criteria, your worldwide income is subject to tax.
On the other hand, if you do not meet the criteria for tax residency, you are considered a non-resident in Portugal. Non-residents are only taxed on their Portuguese-source income, such as income derived from employment, business, or real estate in Portugal. It is important to note that non-residents are subject to a flat tax rate of 25% on their Portuguese-source income.
Types of taxes expats need to be aware of in Portugal
As an expat in Portugal, you must be mindful of several kinds of taxes. These include personal income tax, corporate tax, value-added tax (VAT), and property tax.
Personal income tax
Personal income tax is the most common tax expats in Portugal must pay. It is levied on income derived from employment, self-employment, pensions, and other sources. The tax rates for personal income tax range from 14.5% to 48%, depending on the income bracket.
If you are a business owner or self-employed in Portugal, you will be subject to corporate tax. The corporate tax rate in Portugal is 21%, with some exceptions for small businesses and companies operating from the Autonomous Region of Madeira.
Value-added tax (VAT)
Value-added tax, commonly known as VAT, is a consumption tax levied on selling goods and services. The standard VAT rate in Portugal is 23%, with reduced rates of 13% and 6% for certain goods and services. Lower rates apply in the Autonomous Region of Madeira.
Property tax, also known as IMI, is levied on real estate ownership in Portugal. The tax rate for IMI ranges from 0.3% to 0.45% of the property’s fiscal value.
Tax benefits and incentives for expats in Portugal: the NHR in 2024
The End of the NHR Regime
Effective January 1 2024, the NHR regime will no longer be available for new residents. This means that individuals not registered as NHR residents before this date will no longer be eligible for the regime. However, it’s important to note that the existing NHR regime will continue to apply to individuals registered as NHR residents until the end of the ten years set out in the law.
Grandfathering Provision for Existing NHR Residents
A grandfathering rule has been implemented to protect individuals registered as NHR residents. Suppose you are officially registered as a tax resident in Portugal and have applied for NHR before December 31 2023. In that case, you will continue to enjoy the benefits of the existing NHR regime until the end of the ten years. For example, if you register as an NHR resident in 2020, you will be unaffected by the end of the NHR regime and can continue to apply the existing NHR rules until December 31, 2029.
Special Grandfathering Regime for New Arrivals
For individuals who comply with the following criteria, there is a special NHR grandfathering rule in place, i.e. meaning that they can secure NHR status under old regulations by applying for said status until December 31, 2024:
- Having a promissory employment agreement or secondment agreement signed by December 31 2023, to work in Portugal.
- Having a lease agreement or other agreement granting the use or possession of property in Portugal concluded before October 10 2023.
- Having a reservation or promissory contract for property acquisition in Portugal concluded before October 10 2023.
- Enroll dependents at a Portuguese educational establishment by October 10, 2023.
- Have a valid residence visa or residence permit by December 31, 2023.
- Initiating a procedure for granting a residence visa or residence permit by December 31 2023, per current immigration legislation.
It’s important to note that this special grandfathering rule also applies to individuals who are members of the household of taxpayers covered by the conditions mentioned above. For example, suppose you have a promissory employment agreement signed with a Portuguese company to start working in Portugal in 2024. In that case, you can register as a tax resident under the NHR regime and benefit from the special grandfathering rule.
The New NHR (aka NHR 2.0): Portugal taxes for expats working on scientific research and innovation
In addition to the changes to the NHR regime, a new tax incentive for scientific research and innovation has been introduced for individuals relocating to Portugal from January 1, 2024, onwards. To be eligible for this incentive, individuals must meet one of the criteria below:
- Hold a job position or carry out other activity as a tax resident in the Autonomous Regions of Madeira and the Azores under terms to be defined by regional decree.
- Teaching in higher education and scientific research, including scientific employment in entities, structures, and networks within the national science and technology system, as well as jobs and members of governing bodies in entities recognised as technology and innovation centres.
- Qualified jobs and members of the governing bodies of entities fall within the scope of contractual benefits towards productive investment, as defined in Chapter II of the Portuguese Investment Tax Code.
- Highly qualified professions, as defined by a Ministerial Decree, in companies with relevant applications in the year of starting work or the prior five years that benefit or have benefited from the Tax regime for investment promotion (RFAI) or in industrial and service companies (with activities in areas to be defined by Ministerial Decree) that export at least 50% of their turnover in the year of starting work or the prior two years.
- Other qualified job positions and members of the governing bodies of entities engaged in economic activities recognised by AICEP or IAPMEI (investment public agencies) as relevant to the national economy, particularly in attracting productive investment and reducing regional asymmetries.
- Research and development personnel, with costs eligible for the R&D tax incentive system, as outlined in the Investment Tax Code.
- Job positions and members of the governing bodies of entities certified as start-ups under the Portuguese Start-Up Law.
Taxpayers meeting the requirements as new tax residents from 2024 onwards and falling within any of the positions listed above may be subject to a special tax rate of 20% on employment or entrepreneurial income earned within the scope of the said activities for ten consecutive years. To be eligible for this regime, taxpayers must continue to earn active income, with a maximum interim period of 6 months between suitable activities or jobs.
Under the current proposal, eligible taxpayers will be exempt from foreign income tax in several categories, including employment income performed abroad, self-employment income performed abroad, foreign rental income, and capital gains on foreign-based assets. However, it’s important to note that this exemption does not include pension income. Furthermore, certain items of income derived from sources in tax haven jurisdictions will be subject to a flat 35% tax rate.
A Ministerial Decree will regulate the registration of beneficiaries with entities and communication with the tax authorities. Until the approval of such a decree, the activities qualifying as “high added value activities” will be the ones currently applicable for the NHR regime, and the registration of beneficiaries will be made directly with the tax authorities, as in the NHR regime. Understanding that this special regime can only be utilised once is crucial. It is not available for taxpayers who have already benefited from the NHR regime or have opted for partial exemption under a special regime for former residents.
Portugal taxes for expats who were former residents
For former Portuguese tax residents who become residents again between 2024 and 2026, a 50% relief capped at EUR 250,000 of employment and business income is available. This regime applies only to former tax residents who have not been tax residents in Portugal in the five years preceding their application. The relief applies for five years and cannot be combined with any other special regime.
Hiring a tax professional in Portugal
Navigating the Portuguese tax system can be complex and time-consuming, especially if you are unfamiliar with the local regulations and requirements. Hiring a tax professional in Portugal can help you ensure compliance with the law, optimise your tax planning, and minimise your tax liability.
When choosing a tax professional, looking for someone with expertise in international taxation and experience working with expats is crucial. They should be familiar with the intricacies of the Portuguese tax system and be able to provide personalised advice tailored to your specific situation. A qualified tax professional can help you navigate the complexities of the Portuguese tax system and ensure that you are taking full advantage of any available tax benefits and incentives.
Common mistakes to avoid when filing taxes in Portugal
Filing taxes can be daunting, especially if you are unfamiliar with the local tax regulations and requirements. To help you avoid common pitfalls, here are some mistakes to avoid when filing taxes in Portugal:
- Failing to keep accurate records: It is crucial to keep detailed records of your income, expenses, and relevant documents to support your tax deductions or exemptions. Failing to keep accurate records can lead to errors in your tax return and potential penalties.
- Ignoring tax deadlines: Missing tax deadlines can result in late payment penalties and interest charges. It is essential to stay on top of your tax obligations and ensure that you file your tax return and pay any taxes due on time.
- Not taking advantage of available tax deductions and exemptions: The Portuguese tax system offers various deductions and exemptions that can help reduce your tax liability. It is essential to familiarise yourself with these tax benefits and ensure you claim all the deductions and exemptions you are entitled to.
By avoiding these common mistakes, you can ensure that your tax filing process in Portugal goes smoothly and that you minimise your tax liability.
Portugal taxes for expats: making the most of it
Minimising your tax liability on Portugal taxes for expats requires a thorough understanding of the Portuguese tax system, careful tax planning, and compliance with the law. By familiarising yourself with the types of taxes you need to pay, understanding your tax residency status, and exploring tax benefits and incentives such as the NHR regime, you can effectively minimise your tax burden and ensure you take advantage of all available opportunities.
Hiring a tax professional with expertise in international taxation can provide invaluable assistance in navigating the complexities of the Portugal taxes for expats and optimising your tax planning. Avoiding common mistakes when filing your taxes, staying organised, and meeting important tax deadlines are also essential for minimising tax liability and maintaining compliance.
As an expat in Portugal, staying informed about any changes in tax laws and regulations that may affect your tax liability is essential. By staying proactive and seeking professional advice when needed, you can confidently navigate the Portuguese tax system and make informed decisions to minimise your tax liability while enjoying all Portugal offers.
If you have any questions or need assistance with Portugal taxes for expats, contact our experienced tax professionals today. We are here to help you navigate the complexities of the Portuguese tax system and ensure that you minimise your tax liability as an expat.
Disclaimer: This article provides general information and should not replace personalized advice from tax professionals. The content is based on the available information at the time of writing and is subject to change. Please consult with professionals for advice tailored to your specific circumstances.
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